Short-Term Flood Insurance Extension Promises Long-Term Solutions

Short-Term Flood Insurance Extension Promises Long-Term Solutions
June 12, 2012

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)

Federal legislators have given themselves until July 31 to okay a long-term extension of the troubled National Flood Insurance Program.

Senate Majority Leader Harry Reid (D-NV) pledged the Senate would take up a five-year reauthorization bill that includes important reforms to the program, which owes nearly $18 billion to the U.S. Treasury. The program was scheduled to end May 31. On that day legislators approved a two-month extension to buy time for a multiyear extension bill that could not win agreement before the May 31 deadline.

Senate and House bills tackle the issue of premium subsidies, which many NFIP critics say are a major problem. These subsidies go to properties with structures that were built before the introduction of flood insurance rate maps in the mid-1970s. Approximately 20 percent of all NFIP policyholders have coverage for such properties and pay, on average, only 35 percent to 45 percent of the actuarially determined premium needed to cover the risks the properties present.

Proposed reforms include phasing out premium subsidies for second homes, commercial properties, any properties that have sustained severe repetitive losses, and properties that have suffered losses totaling more than half the value of the property. NFIP figures show properties that have sustained severe repetitive losses account for just 1 percent of flood insurance policies but more than 30 percent of claims paid. The NFIP is not allowed to reject applications, no matter how bad the flood risk is.

‘Close to Getting Real Reform’

“We are closer than we've been in the past decade to getting real reform of the National Flood Insurance Program passed in both houses of Congress. The only real stumbling block left is debating an amendment proposed by Sens. Mark Pryor [D-AK] and Thad Cochran [R-MS] that would exempt from the mandate to purchase flood insurance those properties behind levees and other risk mitigation structures,” said Ray Lehmann, public affairs director for R Street, a nonpartisan research organization specializing in insurance issues and headquartered in Washington, DC.

“We think it would be irresponsible to leave people who live behind levees with the impression that they are at no risk of floods, because levees fail all the time, sometimes catastrophically. But whatever way that debate proceeds, it doesn't appear it will hold up larger reform, which includes phasing out subsidized premiums and exploring the option of private reinsurance and catastrophe bonds to shore up the program's finances. For a program that is $18 billion in debt, these are important steps to bring even some small measure of fiscal sanity.”

Levee Defense

In written testimony to the Senate Banking Committee, Cochran, Pryor and other Senators argued, “Areas protected by properly constructed and maintained levees, dams, and other flood control infrastructure should not be arbitrarily declared areas of special flood hazard. Under this provision, an area protected by a healthy levee that has a 1 in 500 chance of flooding in a given year based on actuarial analysis would be required by the federal government to carry flood insurance and adopt land-use restrictions, while an area not protected by a levee that has a 1 in 101 chance of flooding in a given year would not be required to purchase the insurance. In addition to the federal requirement to purchase insurance triggered by such a declaration, these communities would be forced to adhere to heightened land use and control measures, in effect imposing federal zoning ordinances, depriving these communities and citizens of local control, diminishing property value, and reducing local revenue generation.”

Program critics span the political spectrum. In a recent joint column in the Miami Herald, Sarah Murdock of The Nature Conservancy and Charles M. Chamness of the National Association of Mutual Insurance Companies called for program reforms and noted:

“Although it has the word ‘insurance’ in its name, the NFIP has not been allowed to operate like an insurance program. It can’t charge the rates it needs to; is barred by Washington from building a surplus to pay claims in bad years; has outdated flood maps; and does not devote enough resources to ‘preventive-care’ natural- and built-in infrastructure solutions that would greatly reduce the cost of flood damage during extreme events.”

Steve Stanek

Steve Stanek (sstanek@heartland.org) is a research fellow at The Heartland Institute and managing... (read full bio)